For forty years, the NCUSIF has maintained not only its own financial integrity but more importantly, the trust and confidence of the credit union system’s members. This record of stability began in 1985 and continues unabated through 2023.
Over the same four decades the FSLIC, the separate S&L fund, failed and merged into the FDIC. The FDIC has had negative net equity on several occasions requiring an explicit government guarantee. It has constantly modified its premium model to accommodate numerous industry crisis. These include multiple premium levels, risk based pricing, an expanded assessment base for premiums, differential pricing according to institution size and other financial or accounting maneuvers. It’s equity to insured deposits has fluctuated from negative to 1.1% at June 30, 2023.
During this same period of national economic and interest rate cycles, the NCUSIF’s unique cooperative design allowed it to remain strong. The fund’s yearend equity level of 1.2-1.3% of insured shares has always been met. Premiums have been necessary only four times in this four decades.
“D” For Deposit Day
This fundamental redesign was a two-year industry wide effort.
This priority came to fruition in January 1985 when the first 1% credit union deposit underwritings for the new insurance model were delivered to NCUA. The event was pictured in NCUA’s 1985 Annual Report (pg 21):
(caption: NCUA Staff Member Wayne Robb accepts a hand-delivered capitalization deposit in the unheated Washington lobby of the NCUA.)
The Chicago Tribune described this historic change in an article later that year:
“The solitary messenger clutched a plain brown envelope as he picked his way carefully across a deserted, icy sidewalk near the White House. In- side was a check for $13 million.
“It was inauguration Day, 1985, a morning most memorable for the raw cold that forced cancellation of a parade and drove President Reagan inside to take his second oath of office.
“But for the messenger, and for the trio huddled around an electric space heater waiting for the check, it was also the deadline for credit unions to deliver payments to the new-look federal insurance fund that backs the deposits of 51 million credit union members.
“The $13 million check, the largest single payment, was from the huge Navy Federal Credit Union in Washington.
“The little-noticed transaction–one of more than 7,000 totaling $480 million that frosty January weekend–illustrates how the nation’s 15,000 federally insured credit unions have quietly put their house in order.
“Edgar F. Callahan Chairman of the National Credit Union Administration said credit union’s willingness to embrace a new approach to shoring up their insurance fund was just one example of how the industry has recovered from the hard times of 1981.
The challenge for his successor, Callahan said, is to keep Congress and other policy-makers aware that credit unions are unique.
“You’re in an industry this often grouped with banks and S&L’s and there’s a tendency to get painted with the same brush,” he said.
“There is a danger to getting sucked into that atmosphere. My successor will need to maintain that credit unions have been ahead of the problem curve and need not be grouped with other financial institutions.”
The Workup for Change
The NCUSIF was created in 1970, with no government-provided startup capital. The Fund’s design mimicked the premium base of both the FDIC and FSLIC each which had a 35-year head start accumulating retained earnings. But from 1979 onward the premium approach, even with doubling assessments, did not prevent the Fund’s equity ratio from decline.
In April 1983 the NCUA presented a Report to Congress on the Credit Union Insurance Fund. The Report was over 130 pages in seven chapters responding to specific Congressional questions and making four recommendations:
- All credit unions, federal or state, should have a choice of insurer;
- Capitalize the NCUSIF with a 1% deposit of insured shares;
- Authorized at least one uninsured share per member as capital;
- Keep the insurance fund independent from FDIC/FSLIC due to the unique nature and role of credit unions.
The Report included direct quotes from leagues, private cooperative insurers, credit unions along with a history of credit union stabilization options prior to NCUA insurance.
Following the publication of this Report, NCUA and credit unions working in partnership developed an alternative to the traditional premium model describing it as, A Better Way. It drew upon the two decade experiences of private insurer alternatives. It rested on the fundamental cooperative concept that members should own their own fund.
The financial logic and analysis was summarized in a video sent to all credit unions and interested parties on the NCUA’s Video Network. The following is an excerpt from this longer analysis, A Better Way:
This redesign was achieved by challenging long time conventional governmental practice. The alternative was drawn from cooperative experience and principles.
Trust in the Fund was not due to more regulation or open ended premium assessments. It was constructed on mutual commitments including frequent and audited financial transparency, accountability for expenses and legislative guardrails.
This capacity to “imagine differently” resulted from collaboration and open communication at every step. The historical financial analysis (above) and future forecasts were public, for all to review and refine.
The effort was not a sudden epiphany. Rather it resulted from hard work, shared viewpoints, a desire to create something better and courage to change.
The First Year’s Bottom Line
At the end of fiscal 1985, the fund held $883 million in 1% deposits. Earlier in the year each credit union received a pro-rata equity distribution (in excess of the Fund’s .3% equity) of $80 million to meet the January 1% funding obligation followed by a $30 million cash dividend at yearend.
This 12.5% return on the 1% capital deposits was on top of fact that this was the first year since the Fund opened in 1970 that no premium was charged. (page 5, 1985 NCUSIF Annual Report)
In future blogs I will present how the fund navigated specific economic and industry challenges.
Continued success does not rest on design alone. Credit unions must also exercise continuous oversight of NCUA’s vital responsibilities for fund management and supervisory oversight.